. Using the IS-MP model in a closed economy, explain the impact of tax cuts on...

. Using the IS-MP model in a closed economy, explain the impact of tax cuts on the interest rate (r) and output (y), indicating the multiplier effect and crowding-out effect on the graph

Solutions

Expert Solution

Is-mp model is indicatiing investment saving and monetary policy trends and their relationship in an economy. It is a macroeconomic tool which displays short term changes and trends in in interest rates, inflation and output in an Economy.

If tax cut then saving increase which may increase investment and thus it may led to increase production or output of gdp. Tax may increase inflation as money supply increase in the economy. It will led to decrease interest rate as money supply increaseincrease, investment increase and also employment generation in the economy.

Multiplier effect will be seen as increase money supply will increase investment and this created jobs which again increase saving and investment and thus this situation led to overall aggregate demand bor output increase in the economy.

Crowding out effect is there as taxes cut may increase money supply fir private investor also and thus private investment will increase and this led to crowding reduce crowding in .effect.

As aggregate demand curve shifts to right show increased money supply and thus increasing private investment , which is against the crowding out as government spending or money supply will be same or decrease in such situation as cimpare to before.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Use the IS-LM model of a closed economy to explain and graphboth the short run effects...

Use the IS-LM model of a closed economy to explain and graphboth the short run effects and the long-run effects of an increase in the money supply on national income, interest rate, investment, and the price level.

The recent tax cuts are the type of policy that typically used to stimulate an economy...

The recent tax cuts are the type of policy that typically used to stimulate an economy during a recession, but they have been implemented during an expansion. Make two arguments (using narrative and graphs, both), one in support of the policy and one against it. Use economic reasoning in your answers.

The recent tax cuts are the type of policy that typically used to stimulate an economy...

The recent tax cuts are the type of policy that typically used to stimulate an economy during a recession, but they have a been implemented during an expansion. make two arguments(using narrative and graphs, both) one is support of the policy and one against it. use economic reasoning in your answers.

What’s the impact of the corporate tax on economic growth compared to Regen and Bushes cuts?...

What’s the impact of the corporate tax on economic growth compared to Regen and Bushes cuts? Name three aspects of tax overhaul and what are their benefits and consequences?

Discuss the economic impact of the Tax Cuts and Jobs Act of 2017 (TCJA) on: 1....

Discuss the economic impact of the Tax Cuts and Jobs Act of 2017 (TCJA) on: 1. U.S. corporations. 2. U.S. economy 3. Other countries including tax havens

Using the long run model of a small open economy to graph the impact of reducing...

Using the long run model of a small open economy to graph the impact of reducing the government budget deficit (T up or G down) on the us exchange rate and trade balance. Draw corresponding diagrams for the market of loanable funds and foreign currency exchange market. Please label axes, curves, equilibrium values, curve shift direction. Based on the graph, explain why Camdessus' policy is useful here. What happens to the exchange and trade balance because of the government budget...

Explain the impact of monetary injection into the economy using Fisher Equation.

Consider the real intertemporal model with investment (closed economy). a. Using multiple related diagrams, show how...

Consider the real intertemporal model with investment (closed economy). a. Using multiple related diagrams, show how the labor market, production function, output supply, output demand, and interest rate all relate. b. Explain what influences the labor market, production function, output supply, output demand, and interest rate and how they relate

Consider the AS-AD model of a closed economy. a. Write down the expressions for the AS...

Consider the AS-AD model of a closed economy. a. Write down the expressions for the AS and AD curves and interpret the expressions: what is the intuition behind the two curves? What must be true of the model parameters and variables in the long-run equilibrium, i.e. in the steady state? b. Analyse the effects of a supply shock that causes a temporary increase in inflation, using a diagram. Assume that the shock lasts for one period and then assumes the...

6. (14 pts) There is a decrease in income in a closed economy. Derive the impact...

6. (14 pts) There is a decrease in income in a closed economy. Derive the impact of the decrease in income on the credit market and money market assuming flexible prices. Determine the impact on the equilibrium expected real rate of interest and the price level. Also determine the impact on equilibrium savings, investment, and real balances. You must use graphs to receive hill credit

Subjects